Written Commentary
CRUDE OIL
While there can always be a surprise from the US Federal Reserve, under most likely scenarios’ fundamentals point to further softening demand. Therefore, a 2.6% weekly decline in ARA crude oil inventories, and a reduction in Russian Urals loadings is of little interest to the trade early today. In fact, seeing the US release “additional” oil from its strategic reserve combined with an avalanche of recession headlines expected throughout today’s trade should leave both supply and demand bearish. Therefore, the crude oil market is likely to encounter fresh macroeconomic selling pressure following a widely anticipated aggressive US interest rate hike. Furthermore, the dollar could also apply fresh pressure to crude oil prices if the Fed extends its very hawkish dialogue in its forward guidance. Seeing the Brent-WTI spread reach $9.20 a barrel yesterday confirms fear of building US over supply and might also be the result of potential spillover demand for petroleum in Europe in the event of a severe shortage of gas.
While we will not rule out a September gasoline trade above $3.20 in today’s action, rallies should be viewed as selling opportunities. In fact, headlines are already rife with examples of deterioration in the standing of “consumers” because of surging fuel and food costs and further pressure on the consumer is likely from upside follow through in food and retail prices. Furthermore, a slow erosion in US seasonal gasoline consumption, discouraging EIA demand news and evidence of a building pattern of rising US weekly gasoline inventories should embolden the bear camp especially on rallies. Another negative fuel demand headline came from India overnight from analysis pegging the Indian fuel duty to cost consumers 1 trillion rupees.
NATURAL GAS
On one hand, yesterday’s significant range up trade ($0.84) initially resulted in a sharp setback, but fundamentals remain supportive of the bull camp. The US 8 to 14-day forecast has three-quarters of the US under significantly above normal temperatures, but that bullish news is offset by near normal temperature forecasts in Europe. Part of the significant rally in prices yesterday was the result of reports from Russia that they had not received the turbine to facilitate supply flow through its pipeline. In a negative demand development, the EU did agree to reduce its consumption of Russian gas and there are rumblings of an increase in European electricity generated by coal.
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